Stipends - DeMinimus or Taxable?

[Corduroy Frog]

A client of mine is confronted with the need to provide cellphone service for 8 employees.  All of them already have cellphones.  It will be cheaper to pay a stipend of $20/month directly to the employees than to furnish phones and service.

The question is:  This is $240 per year.  Is it taxable?  or does it fall into a "deminimus" category than the IRS would ignore?

Asked from a different perspective:  Is there a "safe harbor" dollar amount where such a stipend crosses a threshold from deminimus treatment into taxability??

[DANRVAN]

17 hours ago, Corduroy Frog said:

the need to provide cellphone service for 8 employees

Assuming this is an ordinary and necessary business expense, why would you not recommend treating as a reimbursement under an accountable plan?

[DANRVAN]

18 hours ago, Corduroy Frog said:

Is there a "safe harbor" dollar amount where such a stipend crosses a threshold from deminimus treatment into taxability??

Suggest you review Reg. Section 1.132-6(b) and note reference to frequency.

[Lee B]

20 hours ago, Corduroy Frog said:

 

Asked from a different perspective:  Is there a "safe harbor" dollar amount where such a stipend crosses a threshold from deminimus treatment into taxability??

Last year or the year before the IRS decided that when an employer pays for a cell phone and the monthly bill, that the personal usage by an employee was 

no longer taxable. Unfortunately, this is not your client's situation. Other nontaxable items are one time payments like Safety Awards or the proverbial "Thanksgiving

Turkey"  Your client's socalled stipend is not one time but monthly so from my point of view this is taxable income.

Actually many years ago I was an Accounting Supervisor for a good sized Forest Products Company, who would buy a truckload of frozen turkeys

and then give them out to the employees.

[Corduroy Frog]

8 hours ago, DANRVAN said:

Assuming this is an ordinary and necessary business expense, why would you not recommend treating as a reimbursement under an accountable plan?

Dan this is good thinking.  Fact is, however, that people would prefer using their own smart iphones than to carry around basic phones that only allow phone calls.  Today's phones will take you to the moon and back, order lunch from Zaxbys, and book your next vacation in Mozambique.  It would be less grief on the employer to just incur the tax than to deal with employees trying to separate the charges on an expense report.

Employer could simplify things by "cloning" a monthly expense report, but that is not what an expense report is supposed to be.

[Corduroy Frog]

After reading the responses, and looking at the Reg, it seems like the regular monthly stipend would make this taxable.  Has more to do with the periodicity than the amount.

Thanks to all.

[DANRVAN]

15 hours ago, Corduroy Frog said:

regular monthly stipend would make this taxable.

So you are not aware of the 2011 IRS Notice that pertains to employer provided cell phones and the related IRS memo that extends business use provisions of the notice to reimbursements of employee cell phones?  I do not have time to post details now.

[Corduroy Frog]

I'm sure I am not.  9 years ago, somebody probably covered that in a Seminar.  If you can provide a citation I will read it.  Notices usually begin with the year #.

[Lee B]

Just Google "Reimbursement of employee phones" and you will find lots of stuff

[Abby Normal]

Most employees likely have an unlimited talk and text plan so it doesn't cost the employee anything to use their personal phone.

I wouldn't mind having a separate phone for work and personal. I don't want customers, vendors, coworkers, etc. knowing my personal cell number.

Another option would be for all employees to install Google Voice and get a Google voice number. You can set up a Google voice number to ring on your phone. And when you use the Voice app to call out, the caller ID is your Google voice number.

I did this when I was phone banking for the election and didn't want my number coming on the caller ID and getting crank calls back.

[DANRVAN]

Notice 2011-72

_ResourcesAndTools_hr-topics_compensation_Documents_sbse-04-0911-083 (1).pdf       

The notice is 2011-72 and the memo is attached as pdf above.

The memo directs examiners to follow the same business use criteria of employer provided cell phone (per the notice 2011-72) in situations involving reimbursements to employee's for business use of personal cell phones.

The memo states that the reimbursement for business use should be done in a reasonable manner.

Given all the potential business applications of a cell phone, $20 sounds reasonable based on fact and circumstances. 

 

[DANRVAN]

17 hours ago, Abby Normal said:

it doesn't cost the employee anything to use their personal phone

That does not appear to be a limitation by the IRS per the memo in regards to reimbursements.

 

[Lee B]

19 hours ago, Abby Normal said:

 

Another option would be for all employees to install Google Voice and get a Google voice number. You can set up a Google voice number to ring on your phone. And when you use the Voice app to call out, the caller ID is your Google voice number.

I did this when I was phone banking for the election and didn't want my number coming on the caller ID and getting crank calls back.

I am curious. Is Google Voice easy to use. If you get a call, is it easy to tell which line is active ? 

[Medlin Software, Dennis]

For two lines, a dual sim phone is much easier.  The problem is, in the US, these types of phones are hard to come by, and have some issues.  For instance, google's cell service is one where you can get and easily use a dual sim phone, but your second line will not be "captive" so certain carriers will not allow certain things.  If you use a phone captive to a major, to get all the services, then they likely prevent use of the second sim, even if the phone has it.

In my case, the problem was the second line would not use wifi when cell service was not available.  I need a major for best connectivity, and the other major for times when the other has no service (when traveling).  Two phones (actually three) is what I end up with to accomplish what I want.  One for each major, and a google cell as a normally "suspended" alternative.  Creative call forwarding settings means whatever phone I have on with reception reaches me.  (I also carry a SpotX satellite handheld, so I can text message out when there is no cell coverage.)

On the OP, it always makes me smile when such a small change to taxable income causes so much kerfuffle.  Most TP's who ask are not in a high enough bracket where the extra taxable covers the time spent researching.  Employer can make it easy by a taxable addition, say for the desired amount plus 10%.  As someone who has two family members who will eventually depend for a large part of their ongoing income based on my SS numbers, anything which can maximize taxable pay up to the SS limit is not a bad thing.

[DANRVAN]

1 hour ago, Medlin Software said:

Most TP's who ask are not in a high enough bracket where the extra taxable covers the time spent researching.

So your response to client in OP would be......"I don't know"......"I haven't kept up on that topic"..."it is cheaper for you to add to wages than to pay me five minutes to research"....?   Or maybe employee's tax preparer will catch it and get back to you.

[DANRVAN]

1 hour ago, Medlin Software said:

anything which can maximize taxable pay up to the SS limit is not a bad thing.

So we have a responsibility to maximize SS vs minimize income tax for client's employees?

 

[Medlin Software, Dennis]

20 minutes ago, DANRVAN said:

So your response to client in OP would be......"I don't know"......"I haven't kept up on that topic"..."it is cheaper for you to add to wages than to pay me five minutes to research"....?   Or maybe employee's tax preparer will catch it and get back to you.

The employer seems to have already made their decision.  It is well established the employer cannot provide money to the employee tax free, no matter what term they use, unless it is to reimburse a direct expense or something else accountable in nature.  The likely push back (and mostly the direction I was commenting on) will be from the employees, if any or all of them realize the 20 is taxable remuneration.

Dealing with getting monthly or other time frequency allowed accountable reports from 8 employees is not free.  Likely the employees will do their part on company time, and the employee will have to beg for then review and store the records.  Does not seem like the employer wants to provide the phones, which I think would invoke the non accountable aspect.  The one caveat for the employer to consider is what the 20 really costs.  Multiply by 7.65% (assuming none earn over the SS limit), and their WC rate.  For most, would not be additional UI taxable wages, but possible for a lower wage worker in a high UI wage base state.

The reality is, a large number of employers will "reimburse" incorrectly, calling it a stipend or some other term, and will not report it as remuneration.  Unless someone inquires, it will never be noticed, or penalized, as a separate issue, since the amount is likely not going to cause a significant "profit" for an auditing agency.  I still see employers who do things like pay "rent" for tool or vehicle use, and issue a 1099 to those employees.

The employee's tax preparer will not likely notice, as the amount is not likely going to be on a W2, and (most) employees should not be getting a 1099.

[JohnH]

5 hours ago, Medlin Software said:

As someone who has two family members who will eventually depend for a large part of their ongoing income based on my SS numbers, anything which can maximize taxable pay up to the SS limit is not a bad thing.

Even that calculation reaches a point of diminishing returns.  I'm 72 and I just received a increase in my social security benefit due to my current income replacing a low-earning year somewhere in the distant/forgotten past.  I estimate that I'll break even on the transaction (Social Security EE withholding plus ER matching which I also pay) sometime around age 95.  But after that I'll be ahead by $300 per year or so, so there's that...